Building an Investment Portfolio II:

byBrad FerrisonJune 1, 2007

Investment Objectives

Now that you’ve developed a solid understanding of your personal situation & spending behaviours, you are ready for the next step. Setting objectives, in any activity of your life, is an important tool that anyone can develop. We all do this on a daily basis: grocery or to-do lists, what we want in a new car or home, picking out what to wear, etc. Investing objectives are simply more specific and outline what purpose you want the money to serve in the future.

“What is the money for” & “What would I like it to do for me” are two very important questions to ask yourself. Saving for a large short-term purchase, generating money to use over the medium term or simply saving for an early retirement are all good examples of why some people want to invest. Some investors will want to put away a set amount of money for safe keeping, some to generate income and others to grow their money over time. You may even want to incorporate an element of each into your objectives – what I call safety vs. income vs. growth. The point being that it will depend entirely on your personal situation which you’ve already generated from part I.

Risk vs. return is something many people have heard before and there’s nothing new to learn here about it. The basic idea behind it is “how much of my investment am I willing to lose in order to achieve a certain gain.” Everyone’s risk tolerance will be different depending on their set investment objectives. For someone who wants to save their money for a large short-term purchase, it doesn’t make much sense to invest aggressively into the stock market. Likewise, someone investing for retirement 20-30 years in the future probably won’t invest heavily into low return generating investments. Once you’re understand your level of risk, then mixing the right proportions of investment products or developing a specific strategy will be much easier.

You also want to consider the tax implications of your investing objectives. Someone in a high tax bracket may want to take advantage of RRSP contribution room to lower their taxable income. On the other side, someone in a lower tax bracket who won’t benefit greatly from RRSP contributions may want to take advantage of favourable dividend tax treatment in Canada. It’s important to consider what effect taxes may have on your investing activities because taxes can limit your earning power considerably over a long period of time.